Is Increased Tax on Sales a Good Idea?

Last updated on January 29, 2012

Republican governors are contemplating increasing sales tax and lowering income taxes. Economists at the OECD (Organization for Economic Co-operation and Development) studied various types of taxes and discovered that sales tax is the least harmful tax for economic growth.

Western European countries have some of the world’s highest value-added tax (VAT). Scandinavia, Sweden, Denmark and Hungry have high VATs, with Hungry at the top with 27 percent. Grocery, books, newspapers are some items that have a lower VAT. Increasing the sales tax is attractive because it increases savings and investment, and boosts economic growth.

An argument against a “consumption tax” is that it leans heavily towards the rich because they earn much more than they spend, and would pay fewer taxes with a high sales tax. Economists believe that this limitation can be countered by excluding certain basic living necessities, such as rent, clothing, food, and medicines from the consumption tax.

One of the biggest challenges faced by tax authorities is the collection of taxes. In 2003, uncollected taxes on remote sales was at $20.4 billion. It increased to $54.8 billion in 2011. E-commerce has also impacted the collection of taxes. Effective collection of taxes will help in reducing the country’s tax gap.

Changing of tax laws to improve economic growth without burdening taxpayers is ideal and the recent discussions by Republican governors exploring the possibility of a better tax system is a positive step towards that ideal.